DISCOUNT & INFLATION

ESECON230
Discount
Discount is defined as interest deducted in advance. In negotiable
paper, it is the difference between the present worth of the paper and
its value sometime in the future.
Discount on a negotiable paper is the difference between the
present worth (the amount received for the paper in cash) and the
worth of the paper at some time in the future (the face value of the
paper or principal). Discount is interest paid in advance.
Discount = Future Worth – Present Worth
The rate of discount is the discount on one unit of principal for one unit
of time.
Rate of Discount
Rate of discount is defined as the discount of one unit of
principal for one unit of time.
In the cash flow diagram,
P = (1+i)-1
and F = 1.00
Using the formula of discount,
d=F–P
d = 1 - (1+i)-1
d = 1 – __1__
1+i
Example Problem on discount
A man borrowed P5,000 from a bank and agreed to pay
the loan at the end of 9 months. The bank discounted
the loan and gave him P4,000 in cash.
(a) What was the rate of discount?
(b) What was the rate of interest?
(c) What was the rate of interest for one year?
Solution:
Inflation
Inflation is the increase in the prices for goods and
services from one year to another, thus decreasing the
purchasing power of money.
FC = PC ( 1+ f)n
where:PC = present cost of a commodity
FC = future cost of the same commodity
f = annual inflation
n = number of years
Example
An item presently cost P1000. If inflation is at the rate of 8% per
year. What will be the cost of the item in two years?
Solution:
𝐹𝐶 = 𝑃𝐶 (1 + 𝑓)𝑛 = P1000 (1+ 0.08)2 = P1,166.40

In an inflationary economy, the buying power of money decrease

as cost increase. Thus,
𝑃
𝐹=
1+𝑓 𝑛
Where: F is the future worth, measured in today’s pesos, of
a present amount P.